APPROVALENVIRONMENTAL CONSULTING AND ENGINEERING FIRM by
Barbara Gilmore
MSc Environmental and Ecological Sciences, University of Lancaster
1990
BSc (Hons) Industrial Chemistry, Paisley/West of Scotland
University 1987
PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF
THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
of the
Spring 2011
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Degree: Master of Business Administration
Title of Project: An Analysis of Strategic Opportunities available
to an
Environmental Consulting and Engineering firm
Supervisory Committee:
___________________________________________
Date Approved: ___________________________________________
Company Y is a full-service environmental and engineering
consultancy cost leader with
a client base in British Columbia and Alberta. The firms services
help both public and private
sector clients meet their environmental obligations under federal,
provincial and municipal
government legislation, regulations and programs, as well as meet
industry standards, regulations,
and best practice.
Renewable energy, heat savings and energy efficiency initiatives
that reduce greenhouse
gas emissions and climate change impact are environmental sector
growth areas. Despite being
part of the heat and energy efficiency sector, Company Ys Renewable
Energy division operates
at a loss.
This paper presents a strategic analysis of the Renewable Energy
divisions primary
service, geoexchange, and discusses the options available to
Company Ys management team.
Keywords: Environmental Consulting and Engineering; Geoexchange;
Heat and Energy
Efficiency; Renewable Energy;
iv
Dedication
To Kasey, my wonderful partner in life. To my family and friends
who are always there
when I need them.
v
Acknowledgements
I would like to thank my supervisor, Dr Mark Frein, for his
guidance and for this
interesting project. I would also like to express my gratitude to
the CEO, the VP of Development,
and staff at Company Y for their time.
I would like to express my gratitude to Dr Colleen Collins for her
valuable insight, and
enthusiastic support for this program.
I would like to thank the Executive MBA faculty and staff for their
dedication to the
program and for creating a great learning experience.
Finally, I would like to acknowledge and thank my cohort team,
SolarFish (Jay Buckley,
Matt Collette and Kiana Mohseni) and the EMBA Cohort 2009.
vi
COMPANY Y
.................................................................................................................................
1
1.1 Introduction
.............................................................................................................................
1
1.3 An Overview of Company Ys Services
.................................................................................
2
1.3.1 Business Drivers
.........................................................................................................
2 1.3.2 Environmental Services
..............................................................................................
3 1.3.3 The Renewable Energy Division
................................................................................
4
1.4 An Overview of Company Ys Customer Segments
...............................................................
5
1.4.1 Government
................................................................................................................
5 1.4.2 Energy
........................................................................................................................
6 1.4.3 Oil and Gas
.................................................................................................................
8 1.4.4 Mining
........................................................................................................................
8 1.4.5 Construction
...............................................................................................................
9
2: EXTERNAL (INDUSTRY) ANALYSIS
................................................................................
12
2.1 The Environmental Consulting Industry
...............................................................................
12
2.1.1 Environmental Consulting Industry Characteristics
................................................. 13 2.1.2 Size of
the Environmental Consulting Industry
....................................................... 14
2.2 A Competitive Analysis
........................................................................................................
15
2.2.1 Rivalry among Existing Competitors
.......................................................................
15 2.2.2 Threat of New Entrants
............................................................................................
17 2.2.3 Bargaining Power of Suppliers
................................................................................
17 2.2.4 Bargaining Power of Buyers
....................................................................................
18 2.2.5 Threat of Substitute
Products/Services.....................................................................
20 2.2.6 Complementors
........................................................................................................
20 2.2.7 A Sixth Force of Government Policy and Regulation
.............................................. 20
vii
2.4 Industry Attractiveness
..........................................................................................................
24
2.5 Strategic Issues within the Industry – PEST
.........................................................................
25
2.5.1 Political
....................................................................................................................
26 2.5.2 Economic Factors
.....................................................................................................
27 2.5.3 Socio/Demographic Factors
.....................................................................................
29 2.5.4 Technological Factors
..............................................................................................
29
2.6 Market Trends and Opportunities: Growth
Sectors...............................................................
29
2.6.1 Carbon and Climate Change Mitigation
...................................................................
29 2.6.2 Heat Savings and Energy Efficiency
........................................................................
29 2.6.3 Renewable
Energy....................................................................................................
33
2.7 Trends and Opportunities: The Canadian Market
.................................................................
35
2.7.1 Size of the Environmental Goods and Services Market in
British Columbia .......... 35 2.7.2 Characteristics of the
Environmental Sector in Western Canada
............................. 35 2.7.3 The Size of the
Environmental Goods and Services Market in Canada
................... 36
2.8 Trends and Opportunities: The Global Market
.....................................................................
36
2.9 Potential New Markets for Company Y
................................................................................
38
2.9.1 Geoexchange in Alberta
...........................................................................................
38 2.9.2 Geoexchange in Canada
...........................................................................................
41 2.9.3 Renewable Energy in Alberta
..................................................................................
42 2.9.4 The Carbon Offset Market
.......................................................................................
43
3: INTERNAL ANALYSIS
.........................................................................................................
46
3.1 Where Company Ys Geoexchange Service Adds Value
..................................................... 46
3.1.1 Geoexchange Technology
........................................................................................
46 3.1.2 The Renewable Energy Divisions Geoexchange Service
....................................... 47
3.2 Company Ys Resources
.......................................................................................................
50
3.2.1 Human Resources
.....................................................................................................
50 3.2.2 Financial
Resources..................................................................................................
52 3.2.3 Physical Assets
.........................................................................................................
52 3.2.4 Technological
Assets................................................................................................
53 3.2.5 Strategic Assets
........................................................................................................
53
3.3 Company Ys Current Strategies
...........................................................................................
53
3.3.1 Current Corporate Strategy
......................................................................................
53 3.3.2 Services and Customers (Positioning Strategy)
....................................................... 54 3.3.3
Competitive Strategy
................................................................................................
55 3.3.4 Functional Strategy
..................................................................................................
55 3.3.5 Strategic Fit
..............................................................................................................
56 3.3.6 Corporate Social Responsibility
...............................................................................
56
3.4 An Analysis of Financial Performance
.................................................................................
57
3.4.1 The Renewable Energy Divisions Geoexchange Service
....................................... 57 3.4.2 Company Ys
Financial Performance
......................................................................
58
4: COMPANY Y: AN ASSESSMENT OF THE PRESENT SITUATION
............................. 61
5: STRATEGIC OPPORTUNITIES AVAILABLE TO COMPANY Y
................................. 65
5.1 Strategic Alternatives
............................................................................................................
65
viii
5.1.2 Strategy #2: Expand the Renewable Energy Divisions
Capabilities
Accompanied by an Expansion into Niche Markets
................................................ 66 5.1.3 Strategy
#3: Cease the Renewable Energy Divisions Geoexchange
Service.......... 66 5.1.4 Strategy # 4: Downsize the Renewable
Energy Division and Company Ys
Unbillable
Resources................................................................................................
67 5.1.5 Strategy # 5: Expand the Geoexchange Service by
Acquisition or
5.2 Possible Future Scenarios
......................................................................................................
67
5.2.1 Worst-Case Scenario
................................................................................................
67 5.2.2 Best-Case Scenario
...................................................................................................
68 5.2.3 Most Likely Scenario
...............................................................................................
68
5.3 Evaluation Criteria Based on Company Ys Critical Success
Factors .................................. 69
5.3.1 Current Mission, Vision and Values
........................................................................
69 5.3.2 Critical Success Factors
...........................................................................................
69
5.4 Analysis of Strategic Alternatives
.........................................................................................
71
5.4.1 Analysis of Strategy #1: Maintain the Status Quo
................................................... 71 5.4.2
Analysis of Strategy #2: Expand the Renewable Energy
Divisions
Capabilities Accompanied by an Expansion into Niche Markets
............................ 71 5.4.3 Analysis of Strategy #3:
Cease the Renewable Energy Divisions
Geoexchange Service
...............................................................................................
72 5.4.4 Analysis of Strategy # 4: Downsize the Renewable Energy
Division and
Company Ys Unbillable Resources
........................................................................
72 5.4.5 Analysis of Strategy # 5: Expand by Acquisition or
Partnership ............................. 73
5.5 Company Ys Goals and Valuation
.......................................................................................
74
5.6 Scenario Analysis for Company Ys Strategy Selection
....................................................... 77
5.6.1 Best-Case Scenario Analysis
....................................................................................
77 5.6.2 Worst-Case Scenario Analysis
.................................................................................
78 5.6.3 Most Likely Scenario
...............................................................................................
78
6: CONCLUSIONS AND RECOMMENDATIONS
.................................................................
79
6.1 Conclusion
.............................................................................................................................
79
6.3 Recommendations
.................................................................................................................
80
6.3.1 Underperforming Employees in Company Ys Renewable Energy
Division .......... 80 6.3.2 Unbillable Employees in Corporate
Services
........................................................... 80
6.3.3 Conflicts of Interest
..................................................................................................
81 6.3.4 Downsize, Expand and Re-Brand the Renewable Energy
Division ......................... 81
Bibliography..................................................................................................................................
82
List of Figures
Figure 1 Breakdown of Sales by Environmental Consulting Services in
Canada (NAICS 54162)
Figure 2 Porters Five Forces Framework Augmented with a Sixth Force
of Government
Figure 3 Why did your firm invest in Energy Efficient
Technology?
Figure 4 Reported Obstacles to adopting Energy Efficient
Technologies
Figure 5 System Retrofits – Fuel Replaced (British Columbia)
Figure 6 Generation Capacity of Renewable Energy Sources in
Canada
Figure 7 Growth of Global Environmental Markets 2000-2010
Figure 8 Global Environmental Services Market Breakdown 2009
Figure 9 System Retrofits – Fuel Replaced (Alberta)
Figure 10 Total Sales – Residential Geothermal Heat Pump Systems in
Canada
Figure 11 Electricity Generation by Source in Alberta
Figure 12 National Markets for LCEGS Sector
Figure 13 Growth in the Global Carbon Offset Market
Figure 15 Company Ys Geoexchange Service in the Energy Supply
Chain
Figure 16 A Design and Build Project Roadmap
Figure 17 Value Chain Analysis: The Renewable Energy Divisions
Geoexchange Service
Figure 18 Company Ys Headcount Growth
Figure 19 Company Ys Positioning Strategy
Figure 20 Company Ys Competitive Strategy
Figure 21 Company Ys Revenue versus Profit Margin 2008-2010
Figure 22 Company Ys Future Direction – Boston Consulting Group
Growth Share Matrix, 1970
x
Table 2 Key Success Factors
Table 3 A Summary of Industry Competitiveness and Attractiveness
using Porters Five Forces
Table 4 Canadian Government Revenues, Expenditures and
Environmental Expenditures 2005-
2009
Table 5 Future Growth Expectations for Worker Demand in Each
Environmental Sub-Sector
Table 6 GHG Savings Potential in British Columbia
Table 7 Market Share by Brand in British Columbia and Installers
Market Share in British
Columbia
Table 8 Residential Installations in New and Existing Buildings and
Years in Business for Heat
Pump Contractors in British Columbia
Table 9 KW Capacity by Renewable Energy Source in Canada
Table 10 GHG Savings Potential in Alberta
Table 11 Market Share by Brand in Alberta and Installers Market
Share in Alberta
Table 12 Estimated Potential Market Value of Residential Retrofit
Geoexchange Systems in
Canada
Table 14 The Renewable Energy Divisions Financial Performance
2010
Table 15 Company Ys P&M, ES&E, and Renewable Energy
Division Performance 2010
Table 16 Company Ys Weighted Goals
Table 17 Company Ys Goal Predictions
Table 18 Company Ys Valuation Predictions
1
SERVICES AT COMPANY Y
1.1 Introduction
Company Y, founded in 1994 by its current CEO, is a full-service
environmental
consulting and engineering firm that sells its professional
services on a project time and materials
basis primarily to government, energy, and oil and gas clients
across British Columbia (B.C.) and
Alberta. The majority of Company Ys 150 employees are located at
the firms headquarters in
Downtown Vancouver. Satellite offices exist in Burnaby, Victoria
and Calgary, Alberta.
Company Ys core services are its assessment offerings in
environmental impact,
contaminated land, ecology, and socio-economics, which precede the
firms management of
project-specific solutions that include remediation.
Historically, environmental consulting and engineering firms have
grown by responding
to new market challenges. Company Y has responded to these
challenges by diversifying to
remain competitive.
Renewable energy, heat savings and energy efficiency initiatives
that reduce greenhouse
gas (GHG) emissions and climate change impact are just some of the
environmental sectors
growth segments. Unfortunately, Company Ys Renewable Energy
division operates at a loss.
The firms CEO concerned about the divisions revenue, has questioned
its future profitability in
the renewable energy market.
This paper presents a strategic analysis of the Renewable Energy
divisions primary
service, geoexchange, and discusses the options available to
Company Ys management team.
1.2 Company Y: Ownership and Structure
Company Y is a privately incorporated professional partnership with
an ownership split
70:30 between its founder and current CEO, and its current VP of
Development. A Board that is
comprised of five external advisors, the current CEO, and the
current VP of Development
governs the firm.
2
The firm operates with a divisionalized structure along three lines
of business that report
directly into the CEO: 1) Corporate Services includes the support
functions of Finance, HR,
Marketing and Communications, and Development 2) Planning and
Management includes
Ecology and Environmental Management 3) Environmental Sciences and
Engineering includes
Geomatics, Infomatics, Engineering, Renewable Energy, Hydrogeology,
Site Assessment and
Risk Assessment.
In 2010, Company Ys CEO recognized that the firm was not meeting
its revenue growth
targets. Employee feedback identified deficiencies in process and
systems across business
intelligence, customer relationship management, communications,
compensation and
performance management, project, and program management. Declining
financial growth
coupled with employee feedback has led to serious questions about
underperforming units such as
the Renewable Energy division.
1.3 An Overview of Company Y’s Services
Company Ys services help both public and private sector clients
meet their
environmental obligations under federal, provincial and municipal
government legislation,
regulations and programs, as well as meet industry standards,
regulations and best practice.
To remain competitive in the environmental sector, Company Y has
leveraged internal
assets to create stand-alone divisions that service existing and
new clients. However, the
Renewable Energy division requires a significant investment to grow
and diversify further into
the geoexchange value chain, the heat and energy efficiency, and
the green building
environmental sub-sector.
Company Ys current services and the client segments that use these
services are
summarised in Table 1 at the end of this section. This table was
adapted from the Product
Customer Matrix created by Boardman and Vining in 1996. However,
this report with its limited
scope only examines in detail the Renewable Energy divisions
geoexchange service, and the
firms top five client industries (Sections 1.3 and 1.4).
1.3.1 Business Drivers
The clients environmental obligations and Company Ys service
outputs summarized
below provide additional insight into the firms services.
3
The geoexchange service helps clients meet the requirements of the
Greenhouse Gas
Reduction Targets Act administered by the Ministry of the
Environment. The outputs
available from this service are a feasibility report, a design
report, and a test plan.
The environmental impact assessment (EIA) service helps clients
meet the requirements
of the Canadian Environmental Assessment Act and Regulations
administered by the
Canadian Environmental Assessment Agency and the Environmental
Assessment Office.
The output from this service is an environmental impact assessment
report.
The contaminated land and remediation service helps clients meet
the requirements of the
Environmental Management Act administered by the Ministry of
Environment and
Environment Canada. The output from this service is a site
investigation report and a
remediation plan.
The environmental, ecological and risk assessment service helps
clients meet the
requirements of the Canadian Environmental Protection Act (CEPA),
1999, administered
by Environment Canada. The output from this service will feed into
an environmental
impact assessment report or a stand-alone ecological or risk
assessment report.
The carbon and sustainability service helps clients meet the: 1)
Climate Action Plan
administered by the BC Government, Ministry of the Environment, BC
Hydro and
independent verifiers; 2) Greenhouse Gas Reduction Targets Act
(Bill 44 2007)
administered by Environment Canada and the Ministry of the
Environment; 3) Clean
Energy Act, Bill 17 2010, administered by the Ministry of Energy,
Mines and Petroleum
Resources, and Environment Canada. The output from this service is
an environmental
carbon and sustainability report.
Several new opportunities exist for Company Y to help clients
conform to the
Greenhouse Gas Reduction Targets (Cap and Trade) Act administered
by the Ministry of the
Environment and the Emergency Program Act, and, the Oil and Gas
Activities Act administered
by the Ministry of Energy, Mines and Petroleum Resources.
1.3.2 Environmental Services
Long-term environmental impact assessment and First Nations related
projects generate
the highest profit margins for Company Y. A three-year standing
offer from Public Works and
Government Services Canada (PWGSC) provides the firm with
longer-term, but lower margin
revenue streams on contaminated site assessment, risk assessment
and ecological projects.
4
and generate lower margins for short-term projects compared to
environmental assessment, risk
management, and First Nations projects that are long-term.
Company Y believes its competitive advantage lies with the “great
consultants that go the
extra mile” to focus on client needs, a trait that differentiates
the firm from its competitors whose
primary focus is profit. Company Y believes that its growth is
constrained by a combination of
finances, finding the right people with the right skills to lead
the firm into new sectors, and
underperforming employees.
1.3.3 The Renewable Energy Division
Company Ys Renewable Energy division is primarily engaged in the
feasibility, design
and testing of geoexchange systems for buildings. The division
competes in the heat and energy
efficiency environmental sub-sector.
Geoexchange is a relatively new, but commercialized heat and energy
efficiency
technology that enables owners to use the grounds heating and
cooling properties to heat and
cool their property efficiently while reducing GHG emissions. The
heat exchange between the
property and the ground uses standard pump and compressor
technology, in other words a
geoexchange system. Geoexchange is an alternative to traditional
oil, gas or coal fired heating,
ventilating and air conditioning systems (HVAC). Natural Resources
Canada (NRCan) and the
US Environmental Protection Agency (EPA) consider geoexchange
systems to be the most
energy efficient, environmentally friendly and cost-effective HVAC
systems on the market today
(Canadian GeoExchange Coalition, 2011).
Market demand for green construction has increased with changing
standards, including
the BC Building Codes, the BC Energy Efficiency Act, Leadership in
Energy and Environmental
Design (LEED) certification (administered by the Public Safety and
Solicitor General (PSSG)),
and the current standard activity (CSA) in energy C448.2-02 Design
and Installation of
Geoexchange Systems for Residential and Other Small Buildings. LEED
certification provides
building owners, designers and operators with a framework for the
assessment and
implementation of green building design, construction, operations
and maintenance (Green
Building Certification Institute, 2011).
In response to this market demand, specialist firms such as heat
pump manufacturers,
have developed guidelines and proprietary software for their
products to ensure that when a
5
geoexchange system is designed and installed it meets the
manufacturers heat pump
specifications.
1.4 An Overview of Company Y’s Customer Segments
Company Ys top twenty and top five clients generate 89% and 70% of
the firms total
revenue, respectively. The firms revenue streams fluctuate between
a government and private
split of 70:30 and 60:40.
1.4.1 Government
Since 1994, Company Y has served a growing client base that
includes municipal,
provincial and federal governments. The firms top three clients who
account for 46% of the
firms revenue are Environment Canada, PWGSC, and the Ministry of
Transportation (MOT).
Environment Canada is a federal government body responsible for
protecting the
environment, conserving Canadas natural heritage, and providing
meteorological information to
the public. Environment Canada implements the Federal Governments
environmental agenda
through a series of programs and services that ensure the current
and future health and safety of
the environment, the population, and the planet. The agency
enforces environmental and wildlife
legislation across several domains that include the manufacture and
use of toxic substances,
import and export of hazardous wastes and materials, migratory
birds, endangered species, the
protection and conservation of domestic and international waters,
and the conservation of
renewable resources.
PWGSC is a common service agency for the Federal Governments
departments,
agencies and boards. PWGSC is Company Ys third top client,
accounting for 19% of firm
revenue.
MOT is a provincial government body with responsibility for the
implementation of the
governments transportation agenda, and is Company Ys top client,
accounting for 21% of firm
revenue.
In conclusion, Company Y has been successful at outbidding
competitors to win
government contracts for its environmental assessment and
management, ecological assessment
and management, contaminated site assessment and remediation, and
risk management services.
6
1.4.2 Energy
The energy industry within British Columbia is dominated by BC
Hydro, a government-
owned corporation, BCs monopoly producer, transmitter and
distributor of electrical power and
Canadas third largest electric utility company. BC Hydro is Company
Ys second top client,
accounting for 20% of the firms revenue.
BC Hydro has 94% population coverage in B.C., and 95% of BCs
electric power is
generated by an integrated hydroelectric system. Demand for
electricity in B.C. is predicted to
grow 25%-45% over the next 20 years and will be supported by a
series of conservation, buying,
and building. BC Hydro reports to the B.C. Ministry of Energy,
Mines and Petroleum Resources,
and energy policies are detailed in the 2007 BC Energy Plan and
2010 Clean Energy Act. The act
has consolidated BC Hydro and the BC Transmission Corporation into
a single entity responsible
for planning and delivering B.C.s clean energy while fostering job
creation and reducing GHG
(BC Hydro, 2011).
Renewable energy is energy generated from naturally replenishing
resources such as
sunlight, wind, rain, tides, and geothermal heat. Renewable energy
is a stand-alone
environmental sector that has spawned energy technologies that
include solar, wind, biomass,
hydroelectricity, geothermal, and biofuels. BC Hydro generates
54,000 gigawatt hours of
electricity per annum, and the renewable energy projects assessed
by BC Hydro had an annual
energy production capacity of 18,000 gigawatt hours. Only biomass,
geothermal, small hydro
and tidal current are considered sufficient and commercially viable
enough to contribute to BC
Hydros resource mix. Independent Power Producers (IPP) who are
small-scale producers of
renewable energy generate 11,400 gigawatt hours per year and
include private companies,
municipalities, First Nations, or individual customers working
alone or in partnership. Company
Ys Environmental Management divisions clients are IPPs and account
for 9% of the firms
revenue.
A 2007 BC Hydro Power Smart geoexchange market assessment
identified a potential
4,200 geoexchange retrofits and 6,400 installations for new
construction in B.C. which represents
a significant value of potential greenlit project revenue (BC
Hydro, 2007). This project also
concluded that single-dwelling residential retrofit and
single-dwelling new construction
geoexchange systems failed BC Hydros total resource cost test
parameters of conservation and
demand management. Therefore, BC Hydro has chosen not to promote or
incentivize single-
dwelling residential geoexchange systems.
The Canadian GeoExchange Coalition (CGC) and GeoExchange BC are
industry
associations that support and promote the advancement of
geoexchange in Canada and B.C.
respectively. A BC Hydro project entitled BC Hydro Phase I
Geoexchange Energy Performance
Evaluation is currently underway to evaluate and independently
verify the claimed energy
efficiencies set out by CGC in several of their publications. This
project, co-sponsored by BC
Hydro, Fortis Energy BC, the City of Vancouver, and Natural
Resources Canada, project
managed by GeoExchange BC, and executed by one of Company Ys
competitors in the
geoexchange market, should provide future direction to the
geoexchange industry in Canada.
Until the reports publication in May 2011, BC Hydro will provide
only indirect sponsorship to
geoexchange projects for the Institutional, Commercial and
Industrial (ICI) sector through its
High Performance Building program.
Terasen Gas, now FortisBC, is a $12 billion energy utility company
that produces,
transmits, and distributes electrical, natural gas and alternative
energy solutions in B.C. The
firms natural gas and alternative energy lines of business serve
940,000 customers in 125 BC
communities, while the electricity line of business serves 161,000
direct and indirect customers in
the southern interior of B.C. The company is capable of planning,
designing, and building a
variety of energy and energy-efficient solutions that include
geoexchange. FortisBC engages
Company Ys Renewable Energy division for some of the more complex
geological aspects of its
geoexchange projects and accounts for 1% of Company Ys total client
revenue.
In conclusion, the renewable energy and heat efficiency market
landscape poses several
challenges for Company Ys Renewable Energy division: 1) BC Hydros
decision not to
incentivize single-dwelling retrofit and single-dwelling new
construction geoexchange projects
means that buyer demand is likely to be low in two of the Renewable
Energy divisions
geoexchange market segments; 2) the BC Hydro Phase I Energy
Performance Evaluation
contract awarded to one of Company Ys competitors will provide this
competitor with
invaluable and unique geoexchange portfolio experience; 3) two of
Company Ys Renewable
Energy division employees sit on the Board of Geoexchange BC. This
conflict of interest
excluded the Renewable Energy division from BC Hydro Phase Is
project selection phase; 4)
the future direction of the geoexchange market in Canada is
uncertain until the publication of the
Phase I project report findings in May 2011.
8
1.4.3 Oil and Gas
Canada has the second largest proven oil reserves in the world and
produces 2.5 million
barrels per day to make it the worlds eighth largest producer of
crude oil. The worlds current
oil supply of 86 million barrels per day slightly exceeds demand by
2 million barrels per day.
Canadas oil production exceeds domestic requirements and much of
Canadas oil sells on the
world market, predominantly to the US. Crude oil and gas exports
generate revenue of around
$70 billion per year. The industry employs around 300,000 people
and contributes $40 billion to
Canadas gross domestic product (GDP) (Statistics Canada,
2007).
Oil and gas extraction is capital intensive and much of Canadas
resources are non-
conventional, for example the oil sands. Consequently, the oil and
gas industry (upstream, mid-
stream and downstream) has a significant environmental impact on
water, land and air.
Production and processing of oil, natural gas and coal, petroleum
refining, and transportation by
pipeline account for 20% of Canadas total GHG emissions (Statistics
Canada, 2007). Energy
efficient and pollution abatement technologies are an ongoing
concern in the sector. Increased
production levels drive up the operating costs associated with
resource intensive processes and
will eventually trigger an increase in demand for energy efficiency
and pollution control solutions
as firms respond to their environmental obligations. The industry
also uses a significant amount
of water in conventional drilling, oil sands surface mining,
in-situ production, and upgrading,
refining and petrochemical production. The upstream component of
oil and gas accounts for 7%
of total water allocation in Alberta. Although the industry now
recycles 90% of its water, its
environmental impact continues to be high.
The oil and gas sector generates 12% of Company Ys revenue and is a
growth industry
in B.C. and Alberta. This sector provides excellent opportunities
for Company Ys
environmental management, carbon and sustainability, site
assessment, and renewable energy
divisions to provide environmental impact assessment, contaminated
land and remediation,
carbon and climate change mitigation, and, heat and energy
efficiency services respectively.
1.4.4 Mining
In 2006, the mining industry was worth $35 billion with non-fuel
minerals (including
nickel, copper, iron ore, gold and potash) accounting for 91.6% and
coal 8.4% of the total
production value. The industry employs around 47,000 people
contributing $9 billion or 0.8% to
Canadas GDP. The mining industry has implemented responsible mining
best practice to
mitigate or eliminate environmental impacts during exploration,
planning, operations, restoration
9
and research. This sector provides several excellent opportunities
for Company Ys
environmental impact, contamination and remediation assessments,
risk, ecological, and socio-
economic assessments, and carbon and sustainability services.
1.4.5 Construction
In 2010, the construction industry in Canada was valued at $73.9
billion, and although
slightly higher than its 2009 value of $69.2 billion, still
declined from a 2008 peak value of $75.5
billion (Statistics Canada, 2011). The non-residential sector,
rather than the residential sector,
will drive industry growth in 2010 and 2011(Canadian Construction
Industry, 2011). Residential
sector construction has grown by 0.3% in 2010, with 0% growth in
2011. In 2010, non-
residential, which includes institutional, government and
commercial construction, grew by 1.0%-
2.0% in 2010. Employment and investment levels have fallen steadily
from 2008 peaks and
growth will decline into 2012. Property developers are clients of
the construction industry,
clients of Company Ys Renewable Energy division, and a target of
all Company Y divisions.
This decline in the construction market has the potential to reduce
demand for Company Ys
geoexchange and other environmental consulting services.
In summary, Company Ys core competencies are in environmental
assessment and
management, ecological assessment and management, contaminated site
assessment and
remediation, and risk assessment and management. However, the firm
has responded to new
environmental challenges by diversifying to remain competitive.
Although part of the heat and
energy efficiency environmental growth sector, the Renewable Energy
division operates at a loss.
The division faces several challenges and opportunities as it
competes in an unpredictable
geoexchange market that is likely to remain so until the
publication of the GeoExchange BC/BC
Hydro Phase I Energy Performance Evaluation project results.
10
Table 1 Service – Customer Matrix for Company Y (Adapted from
Boardman and Vining 1996)
Customer Public Private
Developers
Oil
Developers
Oil
Assessment
Remediation
Risk
Assessment &
Management
Hydrogeological
Assessment
Engineering
Renewable
Energy
*Private utility clients include First Nations, and other privately
owned non-BC hydro energy projects including IPPs.
12
The environmental consulting industry is comprised of organizations
that provide expert
advice, assistance and recommendations such as the adoption of an
approach, process, or strategy
on environmental issues such as contamination, toxic substances,
and hazardous material
(Statistics Canada, 2009). Such organizations include environmental
and engineering consulting
firms, government owned entities, private sector firms,
associations, and non-governmental
organizations (NGOs).
A profound change in attitude across governments, businesses and
individuals
worldwide, triggered by climate change, represents a tipping point
for the environmental sector.
Governments have responded by introducing new regulations,
legislation, and GHG targets in an
attempt to mitigate or eliminate climate change impacts. Such
environmental business drivers
have increased demand for products and services that offer
prevention at the source rather than
treatment at the end of the product or service lifecycle.
In an industry that serves a highly segmented environmental sector,
climate change and
sustainability issues have spawned a new set of environmental
markets, which combined with
existing segments, form the Green economy that includes:
Land Management: urban forestry and parks; reforestation and
afforestation and soil
stabilization; habitat conservation and restoration: organic
agriculture.
Water Management: water purification; water reclamation, grey water
and rainwater
systems; low-water landscaping; stormwater management.
Waste Management: Brownfield land remediation; Superfund cleanup;
recycling;
municipal solid waste salvage; sustainable packaging.
Renewable Energy: includes solar, wind, geothermal, tidal,
biofuels, and fuel cells for
energy generation.
Green Buildings: LEED construction of new buildings; residential
and commercial
assessment of existing buildings; Retrofit greening for energy and
water efficiency; using
green products and materials.
electric vehicles.
To meet market demand, environmental consulting firms including
Company Y have
expanded by diversifying into new market segments, in particular
targeting some or all of:
Carbon and Climate Change Mitigation: environmental impacts
associated with rising or
falling sea levels, air temperatures, and water temperatures,
declining or improving air
quality, increasing or declining resource demand, population
changes, and natural
disaster management. All represent opportunities for environmental
consulting firms
who are able to offer predictive and preventative business services
across a product or
service lifecycle.
Heat Savings and Energy Efficiency: energy efficiency initiatives
that reduce GHG
emissions and climate change impact.
Renewable Energy Resources: the demand for skills associated with
the production and
distribution of energy from renewable energy sources that includes
wind, photovoltaic
solar, geothermal, biomass, hydro, ocean and tidal/wave.
2.1.1 Environmental Consulting Industry Characteristics
In Canada, a high number of small consulting firms earn 87.1% of
industry revenue while
the 20 largest firms capture 12.9%, a trend that has remained
unchanged since 2006 (Statistics
Canada, 2009). Small firms, by definition less than 100 employees,
compete with several
medium-sized firms (between 100 and 499 employees) and a few large
(500 or more employees)
firms in a monopolistically competitive market structure with low
entry, and exit barriers, and
where many incumbents compete on price and service. Although, there
are opportunities to
differentiate on service, incumbents compete primarily on price in
the public sector, and price and
service in the private sector.
In contrast, US industry data illustrates that firms of greater
than 100 employees capture
65% of market revenue, and firms of between 20 and 100 employees
capture 17% of market
revenue (EBI Inc, 2010).
In Canada, environmental sector segments such as environmental
impact, contaminated
land, and ecological assessment are mature, while carbon and
climate mitigation, energy
efficiency and renewable energy resources are growth
segments.
14
In 2008, the environmental consulting and other scientific and
technical services industry
generated revenue of $4.2 billion, of which environmental
consulting generated $1.64 billion, an
overall increase of 10.4% from 2007, and 32% of total revenue from
all consulting services.
Operating expenditures increased 8.4% from 2007. Profit margins on
average were 18.6% for
environmental consulting firms and 21.8% for management consulting
firms (Statistics Canada,
2008).
Of the total $13.1 billion of revenue from all consulting services
(Management NAICS
54161, Environmental NAICS 54162 and other Technical and Scientific
services NAICS 54169)
management consulting accounted for $8.9 billion. The consulting
service split was 83%:17%
private to public (Statistics Canada, 2008).
A sales breakdown by environmental consulting service illustrates
how segmented
Canadas environmental sector is (Figure 1).
Figure1Breakdown of Sales by Environmental Consulting Services in
Canada (NAICS 54162)
Source: Statistics Canada 2009
2.2 A Competitive Analysis
A US based report ranks Company Y as one of the top 500
international environmental
consulting and engineering firms, generating 2009 revenues of US$17
million (EBI Inc., 2010).
Company Ys Renewable Energy division provides a feasibility, design
and testing service for
District Heating, residential and commercial geoexchange design and
build projects. The
divisions target buyers are engineering firms, construction
companies, property developers,
residential, institutional, commercial and industrial property
owners. The technical design teams
expertise is in geoexchange a relatively new, but commercialized
heat and energy efficiency
technology that enables owners to heat and cool their properties
efficiently while reducing GHG
emissions.
The divisions competitive stance analysed below with Porters Five
Forces framework
augmented with a sixth force of government and summarized in Figure
2 at the end of section 2.2
(Vining, Shapiro and Borges, 2005).
2.2.1 Rivalry among Existing Competitors
Industry incumbents compete primarily on price when bidding on
public sector contracts
that have standard price and technical components. However, on
private sector contracts,
incumbents compete on both price and technical expertise. Aided by
marketing efforts, it is
possible to increase a buyers willingness to pay. Buyers perceive a
difference in an incumbents
services, experience a difference in both technical expertise and
in service quality, and are aware
of their consultants reputation. If an incumbent can increase a
buyers willingness to pay, the
focus on price diminishes. Therefore, there is an opportunity to
service a niche market with a
private sector client who is focused less on price.
Incumbents who are vertically integrated and horizontally
diversified are able to offer a
wider range of products and services, some of which cross multiple
industries that capture cost
advantages through economies of scope. Company Ys Renewable Energy
division has captured
a small (5%-10%) portion of total fee revenue on geoexchange design
and build projects by being
sub-contracted to the clients primary relationship holder who is
either the property developer or
the construction company. Company Y could capture a higher
percentage of total project revenue
with the appropriate internal resources. However, Company Ys
internal resources are
constrained on two levels; 1) despite a wide range of services
including a sustainability and
energy service, Company Y lacks the necessary CGC accreditation,
and project experience to
provide a full-service specialized geoexchange service that
includes the build phase or
16
installation; 2) Company Y lacks in-house LEED accredited resources
to provide a full-service
LEED green building design that would allow the firm to capture the
feasibility, plan, design,
build and test project phases on a green building project with heat
and energy efficiency,
including geoexchange and solar components.
Incumbents such as Company Y have both cost advantages and
disadvantages associated
with proprietary resources. Proprietary information technology
systems that support business
operations are flexible enough to accommodate business
enhancements, but at a high cost.
Information technology resources such as geoexchange design and
built software could broaden
the Renewable Energy divisions geoexchange services and increase
productivity on geoexchange
projects.
unqualified, non-certified individuals, but are able to secure
higher hourly billable rates and
capture a higher proportion of the project value chain while
increasing buyer confidence.
Company Ys Renewable Energy division is disadvantaged on two
levels: 1) constrained by
human and IT resources, the Renewable Energy division is able to
capture just a small proportion
of the design and build project revenue; 2) resources charged out
at below target chargeout and
billable rates do not contribute to the firms performance
goals.
Firms such as BC Hydro and BC Fortis maintain duopoly control over
BCs energy
market and may decide to retain some or all phases of a geoexchange
project in house. Although
unlikely, such a strategy would significantly reduce potential
revenue opportunities available to
the Renewable Energy division.
Overall, twenty-five installation companies capture 40 % of the
residential market in
Canada, but very few compete with each other because the majority
of firms are located in
different regional markets. The top ten installation companies in
Canada are responsible for 25 %
of all residential installations. These specialist geoexchange
firms have an advantage over
Company Y because they are able to offer the full-service of
feasibility, plan, design, build and
test on geoexchange projects while capitalizing on economies of
scope and scale.
In conclusion, the Renewable Energy division is currently
disadvantaged against its
rivals; and, rivalry among incumbents is moderate to high.
17
2.2.2 Threat of New Entrants
The environmental consulting industry is unregulated and so it is
possible for new
entrants to make an easy entry and exit. However, the industrys
clients are likely to be in a fully
or partially regulated industry, and so new entrants are unlikely
to become profitable. Industry
clients prefer to use environmental consulting firms comprised of
experienced, knowledgeable
and accredited environmental professionals.
New entrants are typically unable to match incumbents on technical
expertise, reputation
and service quality, and so the threat of entry on low price
triggers credible retaliation on the part
of incumbents seeking to protect their market share. However,
competing solely on low price is
an unsustainable option that lowers profit margins for all
competing firms.
A new entrant wishing to capitalize on industry trends with a fast
entry and exit would
require operating capital to enter this industry. Investment
capital and annual operating costs
associated with proprietary resources in the form of technical
expertise are high. Exit costs
increase with time as industry incumbents respond to changes in
market demands to remain
competitive.
A full-service geoexchange specialist or a full-service LEED green
building design new
entrant competing in the heat and energy efficiency sector would
easily be able to displace
incumbents such as Company Ys Renewable Energy division. Thus,
while overall threat to
industry incumbents is low, Company Ys division is open to
displacement by these specialist
firms.
2.2.3 Bargaining Power of Suppliers
Company Ys information systems comprise proprietary supplier
software and a mix of
third-party software and hardware. Relationship specific
investments are present, incumbent
asset specificity is high and switching costs are high. Third party
IT supplier bargaining power is
moderate. Therefore, IT supplier bargaining power is moderate to
high.
Company Ys Corporate Services division comprises the support
functions of Finance,
IT, Human Resources, Facilities, Administration, Marketing and
Communications, and Business
Development. Primary functions reside within the Environmental and
Engineering, and Planning
and Management divisions. The bargaining power of Company Ys
skilled resources fluctuates
between high, moderate and low and in line with the external
environments demand for their
18
services, and each individuals level of skill, experience,
qualification and professional
certification. Therefore, their bargaining power also fluctuates
between low and high.
In conclusion, supplier bargaining power is moderate to high.
2.2.4 Bargaining Power of Buyers
The buyers of Company Ys environmental services are either
Government (Federal,
Provincial or Municipal), state or government-owned organizations
or private sector firms and
categorized as:
1. A buyer who must comply with their environmental obligations
under international,
federal, provincial and municipal government legislation,
regulations and programs as
well as with industry standards, regulations and best
practices.
2. A buyer who goes beyond the regulatory framework, is proactive,
and incorporates social
responsibility and sustainability into their business
strategy.
3. A buyer who is voluntarily compliant with some or all
environmental requirements under
international, federal, provincial and municipal government
legislation, regulations, and
programs, as well as with industry standards, regulations and best
practices.
4. A buyer with deep pockets who satisfies their environmental
obligations will follow their
own, and not the regulatory authoritys timeline. Company Y
primarily serves buyers in
the first grouping.
Geoexchange systems have two main purposes: 1) to increase a
propertys energy
efficiency 2) to reduce GHG emissions. The geoexchange market
segments are: 1) a single-
dwelling retrofit 2) a multiple-dwelling retrofit 3) a commercial,
institutional, or industrial (ICI)
retrofit 4) a single-dwelling new construction 5) a
multiple-dwelling new construction 6) an
ICI sector new construction 7) a Municipal District Heating Scheme
8) a stamp and review
service. Typically, the Renewable Energy divisions client will be
the property owner or the
property developer. With the introduction of green building codes
retrofit, new construction and
District Heating Schemes are required to comply with environmental,
resource conservation and
efficiency standards that cover land, air, water and energy across
the plan, design, build and
restoration phases of a geoexchange project. Therefore, because of
compliance issues a buyer is
more likely to purchase an energy efficiency solution. The likely
buyer profile fits with some
clients in Company Ys current client list.
19
The average single-dwelling residential geoexchange system costs
$25,000 to design and
install and represents a sizeable property investment for the
average Canadian homeowner.
Although some Canadian provinces offer financial assistance of up
to 40% of cost, both B.C. and
Alberta do not. BC Hydro has chosen not to promote or financially
incentivize single-dwelling
residential retrofit and new construction geoexchange systems
because they cause electricity
brownouts in neighbouring properties and an increase in customer
complaints. Therefore,
geoexchange technology fails BC Hydros total resource cost test
parameters of conservation and
demand management. In conclusion, a lack of financial incentives
and BC Hydros technical
concerns mean that the current buyer interest in geoexchange is
likely to be low, and incumbent
opportunities to penetrate the single-dwelling residential
retrofits and new construction market
are currently limited.
CGC claims that geoexchange systems reduce GHG emissions, and
increase energy
efficiency, are independently unverified. If the results from the
BC Hydro Phase I Geoexchange
Energy Performance for direct incentive programs for the ICI
sector. In the interim, BC Hydro is
indirectly supporting geoexchange for the ICI sectors High
Performance Building program.
The future growth of the geoexchange sector across residential, ICI
and district heating
schemes is dependent on the results of the BC Hydro Phase I
Evaluation study. Therefore,
incumbent opportunities to penetrate this sector are currently
moderate,
A buyer has instant access to energy efficiency products, services
and prices through the
internet, and a wider choice of incumbents leading the buyer to a
lower priced product or service.
Although Company Ys Renewable Energy division competes as a cost
leader, it is
underperforming which suggest that buyers select a service provider
by a combination of price,
service, and reputation.
Buyer switching costs become high once a buyer has signed a
contract. Incumbents
recognized that early exit loopholes within their services
encouraged buyers to exit without
paying. Company Y requires its client to pay a returnable deposit
and fees in advance. An early
exit from an existing incumbent-buyer contract incurs high buyer
switching costs. However, a
contract increases an incumbents transaction costs.
In conclusion, the bargaining power of buyers is moderate to
high.
20
Reputable firms that offer full-service specialized alternative
energy efficiency
technologies pose the greatest substitution threat to incumbents.
However, a full-service
environmental consulting firm like Company Y through its Renewable
Energy, and Energy and
Carbon Services divisions offers an impartial perspective on carbon
management, sustainability
and energy efficiency. The firms value proposition is an attractive
one for buyers who seek a
recommendation for the best in situ solution.
In conclusion, the threat of substitution is moderate.
2.2.6 Complementors
Company Y already offers a wide-range of complementary products and
services that
include sustainability, contaminated land and environmental impact
assessment. A choice of
complementary products and services may increase the demand for an
incumbents product or
service, but does not significantly increase supplier power.
2.2.7 A Sixth Force of Government Policy and Regulation
The environmental consulting industry is unregulated, but exists to
help an incumbents
buyers meet their environmental obligations under international,
national, and local
environmental policy, regulation and legislation, as well as
professional codes of conduct and
best practices.
In conclusion, the current regulatory and environmental management
framework poses
no barrier to entry or exit. However, government policy drives the
industry and has a significant,
but indirect impact demand for services.
21
Figure 2 Porter’s Five Forces Framework Augmented with a Sixth
Force of Government
Adapted from Porter 1979, and, Vining, Shapiro and Borges
2005
2.3 Key Success Factors
Porters Five Forces analysis identified the environmental
consulting industrys key
success factors (Table 2). A rank of high means that a firm
outperforms the industry average and
poses a threat to its competitors, a rank of medium means there is
some competitive advantage
and threat to competitors, a rank of low indicates that there is no
competitive advantage, and the
threat to competitors is low or negligible.
The Renewable Energy divisions main competitors in the geoexchange
market are:
22
Competitor A: a small B.C.-based company of between 10 and 20
mechanical and
electrical engineers with an award-winning record in LEED
commercial and residential
building design, and a strong client-list that includes
multi-national corporations, small
and medium sized firms.
Competitor B: a small B.C. based company of 50 to 100 employees
that provides
customized energy solutions for commercial and residential
properties. The firm has 65
years of experience, is a full-service CGC certified geoexchange
provider, and an IPP.
Competitor C: a small B.C. based company of less than 100 employees
with 30 years
experience in the design, installation and servicing of HVAC
systems. This CGC
certified firm with 20 years of commercial and residential
geoexchange experience has a
strong presence in B.C., Alberta and Washington State.
Competitor D: founded in 1954, is a 5,000 to 10,000 employee,
publicly traded
architectural and planning consulting firm headquartered in
Edmonton, Alberta with an
extensive North American presence. The firm has diversified into
the environmental
sector to provide environmental and waste management services. The
firm has extensive
LEED experience across all building sectors, including geoexchange,
and secured the
contract for BC Hydros Phase I Geoexchange Energy Performance
Evaluation project.
23
Company
Y
Competitor
A
Competitor
B
Competitor
C
Competitor
D
Medium
High
Medium
Partnerships with
24
2.4 Industry Attractiveness
Industry profitability levels tend to be firm specific, but profit
margins on average are
18.6% for environmental consulting firms (Statistics Canada, 2008).
Table 3 below summarizes
the industrys degree of competitiveness and attractiveness.
Table 3 A Summary of Industry Competitiveness and Attractiveness
using Porter’s Five Forces
Porter’s Five Forces Degree of Threat
Intensity of Competition Moderate to High
Threat of Substitutes Moderate
Bargaining Power of Suppliers Low to Moderate to High
Bargaining Power of Buyers Moderate to High
Government Policy/Regulations High
incumbent’s services.
change an industry segment’s supply and demand
curve.
In conclusion, the environmental industry continues to be a
moderately attractive one.
Firms like Competitor D, with a combination of specialists and
generalists, a high market
penetration rate, a strong technical reputation, and a range of
products and services derived from
the firms core competencies claim a modest 6.19% profit margin on
revenues of $1.513 billion,
one that is lower than the industry average of 18.6%, and Company
Ys 6.49%. Although the
industry average is associated with small firms of less than 100
who generate higher profit
margins, these figures illustrate the competitive nature of the
environmental consulting industry,
as well as some of the financial performance challenges such as
operating costs and revenue
faced by medium and large firms.
2.5 Strategic Issues within the Industry – PEST
Historically, government policy, environmental legislation, and
regulations have driven
the demand for environmental consulting services as firms comply
with regulatory requirements
to avoid financial penalties and damage to their reputation.
Increasingly, buyers of environmental
consulting services do so because of economic, social, and
environmental benefits, collectively
known as sustainability, and are thus engaged in voluntary, rather
than mandatory compliance. In
summary, the drivers of growth in the environmental market
are:
Environmental policy, regulations, and legislation that includes
direct government
spending on the environment, environmental regulation and
legislation, and economic
incentives.
and reduce emissions and energy costs.
Customer demand for environmental goods, services and eco-friendly
practices.
Evolving environmental management practices, product lifecycle
assessments and
business policies.
Changes in government regulations and a desire for sustainability
in both the public and
private sectors have increased demand for green environmental
products and services.
The demand for sustainability shapes the future of the
environmental industrys market to
create opportunities for firms that are able to meet buyer demand
in new market segments.
26
The environmental consulting industry is unregulated, but the
industries the sector serves
tend to be highly regulated. A governments environmental agenda
influences environmental
policy, regulation, and legislation, as well as industry
regulations and best practice therefore,
influencing the environmental sector at a global, federal,
provincial and municipal level.
60%-70% of Company Ys revenue comes from government contracts,
which makes the
firm particularly vulnerable to the current economic climate of
government deficits, budget cuts,
recession and recovery. Despite the 2008 recession, and an
unpredictable economic landscape,
Canadian government environmental expenditure has grown at a higher
annual rate than total
expenditures (Table 4). In previous business cycles during the
recession and recovery stages,
environmental expenditure has decreased. The governments
willingness to increase expenditure,
despite such economic uncertainty, is further proof that the
environmental sector has reached its
tipping point (Section 2.1).
Source: ECO Canada 2010
2.5.2 Economic Factors
The Canadian environmental sector employs 3.2% of total workers, a
level that is greater
than the Pharmaceutical or Aerospace sectors. Government and
industry policy together with
macro-economic factors determine the environmental cost of
compliance. Climate change in
particular has had a profound influence on government policy and
for the next five years
government and private sector spending will continue to drive the
environmental or green
economy more than any other factor. The environmental sectors
emerging and growth sub-
sectors are reflected in employment trends that show an increased
demand for workers in carbon
and climate change mitigation, heat savings and energy efficiency
(Table 5).
28
Table 5 Future Growth Expectations for Worker Demand in Each
Environmental Sub-Sector
Emerging & Very High
Carbon & Climate
Change Mitigation
Water quality
supply
2.5.3 Socio/Demographic Factors
Climate change has heightened the publics awareness of
environmental issues and has
driven the increased demand for environmental goods and
services.
2.5.4 Technological Factors
Disruptive and emergent technologies such as wind power, solar
power, tidal power and
geoexchange have displaced old and environmentally damaging
technologies such as oil and coal.
In conclusion, PEST factors have a significant influence on the
environmental consulting
industry.
2.6 Market Trends and Opportunities: Growth Sectors
The environmental market is highly segmented by service type and
client industry. North
American market data indicates that assessment and audit have
generated the highest year on year
revenue since 1995. The expectation is that the global
environmental goods and services market
will grow at between 4.7% and 7.7% per year (ECO Canada, 2010). The
sectors growth areas
are in carbon and climate change mitigation, heat savings and
energy efficiency, and, renewable
energy resources.
2.6.1 Carbon and Climate Change Mitigation
Services that assess environmental impacts associated with air,
water or land resources
impacted by climate change all represent opportunities for
environmental consulting firms that
are able to offer predictive and preventative business services
across a product or service
lifecycle. Company Ys services offerings in this sector are
currently limited.
2.6.2 Heat Savings and Energy Efficiency
The demand for heat savings and energy efficiency products and
services continues to
increase. Firms that are willing to diversifying will capture a
higher market share of this growing
environmental sub-sector. Environmentally aware buyers still seek a
“sufficient return on their
investment” (Figure 3). However, despite an increased demand, some
barriers to market
penetration continue to exist among those buyers reporting
obstacles as cost and lack of
knowledge (Figure 4). In conclusion, pricing is important, but as
buyer demand increases, the
average price of the technology should decrease.
30
Figure 3 Why did your firm invest in Energy Efficient
Technology?
Source: ECO Canada 2010
Source: ECO Canada 2010
The Canadian GeoExchange Coalitions comparisons of traditional
property heating and
cooling systems show expected geoexchange GHG reductions (Table
6).
31
Source: Canadian GeoExchange Coalition 2010
The average B.C. single-dwelling residential owner will pay $22,689
for a closed
horizontal geoexchange system (51.54% of systems sold) which is
$1,300 less than the Canadian
average; and, $27,889 for a closed vertical system (31.06% of
systems sold) which is $114 less
than the Canadian average of $28,003. Of the other system types
sold, 2.39% of systems are
pond or lake loop, and 15.02% are open loop.
Unfortunately, financial incentives for residential geoexchange
systems are not available
in B.C. or Alberta, unlike the rest of Canada where the average
government funded incentive is
$9,000-$10,000. With an estimated 970,000 single detached homes in
B.C. the single-dwelling
retrofit market has the potential to generate an estimated $22
billion with 100% penetration. The
lack of financial incentives coupled with mixed messages from the
geoexchange industry has
resulted in B.C. buyers opting for alternative technologies or the
status quo. However, despite
buyer uncertainty, there is still some residential demand for
geoexchange system retrofits that
replace inefficient and GHG emitting technologies (Figure 5).
Figure 5 System Retrofits – Fuel Replaced (British Columbia)
Source: Canadian GeoExchange Coalition 2010
32
Market competition and labour costs account for some of the price
differentials across
Canada. Within B.C., the top heat pump brand has a 43.57% market
share and the top three
installers capture around a 29.35% market share (Table 7). With the
exception of specialist firms
such as Competitor C, the primary consultant or developer will
sub-contract the installation of the
geoexchange system, which is the Renewable Energy divisions current
strategy.
Table 7 Market Share by Brand in British Columbia and Installers
Market Share in British Columbia
Source: Canadian GeoExchange Coalition 2010
In B.C., installers have an average of 7.5 years in the geoexchange
business, 82.5% of
installations are for new residences compared to 17.5% for existing
residences. In Saskatchewan
54.1% of geoexchange installations were retrofit and 45.9% for new
residences; in Ontario 66.8%
were system retrofits compared to 33.2% for new residences. An
Ontario installation firm has
been in the business the longest with 11 years experience (Table
8). Being a slightly more mature
market with a higher proportion of residential heating system
technologies like oil and coal, the
retrofit market demand was significantly stronger than the demand
for new installations moving
west to east across Canada.
33
Table 8 Residential Installations in New and Existing Buildings and
Years in Business for Heat Pump
Contractors in British Columbia
2.6.3 Renewable Energy
Renewable energy is energy generated from naturally replenishing
resources such as
sunlight, wind, rain, tides, and geothermal heat. Renewable energy
is an environmental sub-
sector and part of an industry that has spawned new technologies
that include solar, wind,
biomass, hydroelectricity, geothermal, and biofuels.
92% of Canadas renewable energy generation capacity is hydropower
generation (Figure
6). At 6%, biomass is the second largest component. Renewable
energy production sources have
grown steadily since the 1980s at an average annual growth rate of
1.1% (Table 9).
2.6.3.1 The Renewable Energy Market in British Columbia
The increased demand for renewable energy is a result of the
governments
environmental agenda and changes in industry best practice. The
proliferation of IPPs to satisfy
the demand for renewable energy power has provided environmental
consulting and engineering
firms with opportunities to diversify their services to meet market
demands and remain
competitive. Company Y has been successful in meeting such demands
through its wind power
environmental impact assessment service.
Figure 6 Generation Capacity of Renewable Energy Sources in
Canada
Source: ECO Canada 2010
Table 9 KW Capacity by Renewable Energy Source in Canada
Source: ECO Canada 2010
2.7 Trends and Opportunities: The Canadian Market
The environmental good and services market in Canada is segmented
and is dominated
by a high number of small to medium sized firms (SMEs) of less than
100 employees, several
medium (100-499), and a few large (500+) firms.
Company Y would like to expand its operations nationally. This
section examines the
current national markets and provides an overview of potential
opportunities.
2.7.1 Size of the Environmental Goods and Services Market in
British Columbia
In 2004, the environmental goods and services market in British
Columbia was valued at
$2,300 million with 1,352 environmental firms. Sales of
environmental services were $1,314
million (Statistics Canada, 2008). Environmental issues important
to B.C. include fresh water,
climate change, and contaminants, ecosystems, and species
conservation.
2.7.2 Characteristics of the Environmental Sector in Western
Canada
Approximately 2,900 environmental sector firms exist in Western
Canada employing
56,000 people (Western Economic Diversification Canada,
2010).
Western Canada includes the provinces of Alberta, British Columbia,
Manitoba and
Saskatchewan. Each province has its own unique set of environmental
sector characteristics:
Alberta: Canadas third largest environmental market behind Ontario,
and Quebec, has an
industry that supports the provinces energy resources and
manufacturing sectors.
British Columbia: Canadas fourth largest environmental market, has
established itself
with transportation fuel cell technology, water and wastewater
management, and LEED
compliant buildings.
Manitoba: Canadas fifth largest market is focused on research and
development in
geothermal, biofuels, transportation refueling systems, and wind
energy.
36
Saskatchewan: Canadas fifth largest market is primarily focused on
providing impact,
audit, and regulatory studies with particular focus on clients in
the energy, agriculture and
mining sectors.
In conclusion, there are several opportunities for Company Y to
penetrate existing
markets across Western Canada with the firms existing services in
EIA and ESA, particularly in
Alberta and Saskatchewan.
2.7.3 The Size of the Environmental Goods and Services Market in
Canada
In 2008, the sale of environmental products manufactured in Canada
generated $2.3
billion in revenue, $966 million involved machinery, equipment and
product sales associated with
renewable energy production. Environmentally related services
generated the remaining $1.8
billion or 44% of total environmental goods and services revenue of
$4.1 billion. Environmental
consulting services generated 78% of service sector revenue or $1.4
billion. Site remediation and
emergency environmental services generated 22% or $360 million of
environmental service
revenue (Statistics Canada, 2009).
In terms of provincial breakdown, the most recent and available
data from 2004 showed
that Ontario generated 43% of total environmental goods and service
revenue, with B.C. on 13%
and Alberta on 15%.
In 2010, the environmental goods and services market was valued at
$29 billion and
employed 166,000 people (Industry Canada, 2010).
2.8 Trends and Opportunities: The Global Market
Company Y would like to expand its operations internationally. This
section examines
the current global market and provides an overview of potential
opportunities.
Canada represents 1.7% of the global market for environmental goods
and services and
from the years 2000 to 2010, the Canadian market value grew at an
average 7%-9% per annum
(Figure 7). Canadian exports to the United States were valued at
$770 million, $20 million to
Mexico and $210 million to other international markets.
37
Source: Statistics Canada 2004
The global environmental services market encompasses a broad range
of organizations
that engage in the management of the environment and include waste
management firms,
consulting and engineering firms, analytical services firms,
remediation, and industrial service
firms.
The global market comprises North America (Canada, United States
and Mexico); South
America (Argentina, Brazil, Chile, Columbia and Venezuala); Western
Europe (Belgium,
Denmark, France, Germany, Italy, The Netherlands, Norway, Spain,
Sweden and the United
Kingdom); Eastern Europe (The Czech Republic, Hungary, Poland,
Romania, Russia and the
Ukraine); Asia Pacific (Australia, China, India, Japan, Singapore,
South Korea, and Taiwan).
In 2009, the global environmental services market was valued at
$228.5 billion, and by
2014, its predicted value is $276.4 billion (DataMonitor, 2010).
Consulting and engineering
firms generate $36.56 billion or 16% of market revenue. By 2014,
the value of consulting and
engineering services will rise to $44.224 billion assuming that the
consulting and engineering
firms market share remains constant (Figure 8).
38
Source: DataMonitor 2010
In conclusion, the national and global markets are highly
competitive and although one of
the top 500 international environmental consulting and engineering
firms with 2009 revenues of
$17 million, Company Y need to either create new demand in an
uncontested market space or
capture an existing incumbents market to increase its national and
global rank.
2.9 Potential New Markets for Company Y
Company Ys current priority is the viability of its Renewable
Energy divisions
geoexchange services and the divisions market opportunities in B.C.
(Section 2.6.2.1), Alberta,
and Canada. This section examines immediate opportunities in
Alberta and Canada that are
currently available to Company Y.
2.9.1 Geoexchange in Alberta
The Alberta geoexchange market offers some opportunities for
Company Y. The
expected GHG reductions in Alberta property heating, and cooling
systems using replacement
residential geoexchange systems is significant (Table 10).
39
Source: Canadian GeoExchange Coalition 2010
The average Alberta single-dwelling residential owner will pay
$22,111 for a closed
horizontal geoexchange system (18.6% of systems sold) which is
$2,000 less than the Canadian
average; and, $30,399 for a closed vertical system (72.09% of
systems sold) compared to the
Canadian average of $28,003Lower drilling costs reflect regional
geology and a competitive
drilling market explain the lower cost of horizontal systems.
However, a higher willingness to
pay for a closed vertical system is reflected in its higher price.
Of the other system types sold
2.33% are pond or lake loop, and 6.98% are open loop. In the
retrofit market 83.9 % of the
installations replaced natural gas, 6.5 % electricity, 6.5%
Propane, and 2.3% heating oil (Figure
9). These values reflect the high penetration rate of natural gas
in Albertas residential heating
market.
Unfortunately, financial incentives for residential geoexchange
systems are not available
in Alberta or B.C., unlike in the rest of Canada where the average
government funded incentive is
$9,000-$10,000.
With an estimated 856,000 single detached homes in Alberta, and
assuming 100%
penetration, the retrofit market has the potential to generate an
estimated $18.76 billion for closed
vertical systems and $18.9 billion for closed horizontal
systems.
40
Source: Canadian GeoExchange Coalition 2010
Within Alberta the top heat pump brand had a 27.42% share of the
market, and the top
three brands a 72.58% market share. The B.C. and Alberta pump
markets are similar, with the
three top pump brands dominating the market. Although one pump
brand dominated the B.C.
market with a 43.57% share, there was a higher penetration rate by
firms ranked11 to 15
compared to a penetration rate of 0% for firms ranked 11 to 15 in
Alberta (Table 11).
In Alberta, the top three geoexchange system installers captured
55.82% of the market
and the top installer captured 27.91% of the market (Table 11). In
B.C. the top three installers
captured 29.35%.
Table 11 Market Share by Brand in Alberta and Installers Market
Share in Alberta
Source: Canadian GeoExchange Coalition 2010
41
2.9.2 Geoexchange in Canada
There are an estimated 7,181,000 single detached homes in Canada
(Canadian
GeoExchange Coalition2010). The single-dwelling retrofit market
with an average system install
of $25,000 and 100% market penetration has the potential to
generate an estimated $179.5 billion
(Table 12).
Table 12 Estimated Potential Market Value of Residential Retrofit
Geoexchange Systems in Canada*
Province Total
Revenue
Potential
**Open
Loop
Closed
Horizontal
Loop
Closed
Vertical
Loop
**Pond/Lake
Loop B.C. $13.7 billion $3.6 billion $11.3 billion $8.4 billion
$579.6 million
Alberta $39.67 billion $1.5 billion $18.9 billion $18.76
billion
*Assumes 100% market penetration and **Average installation cost of
$25,000.
Pond/lake requires planning permission for non-lake/pond owners.
Direct installations in Canada
are valued at $4.15 billion. In 2009, Canadian sales of residential
geoexchange systems had
reached $220 million with accelerated growth between 2007 and 2008
that leveled off in 2009
(Figure 10). GHG savings are also understood to be significant
(Table 13).
Figure 10 Total Sales – Residential Geothermal Heat Pump Systems in
Canada
Source: Canadian GeoExchange Coalition 2010
42
Source: Canadian GeoExchange Coalition 2010
2.9.3 Renewable Energy in Alberta
Albertas electricity power generation, transmission, and retail
distribution is
municipality and privately owned. Therefore, the potential for
greater IPP involvement exists
when compared to a B.C. energy market monopolized by BC Hydro. In
Alberta, coal is the top
source of electrical power generation (Figure 11). The increased
demand for renewable energy is
a result of the governments environmental agenda and changes in
industry best practice. The
proliferation of IPPs to satisfy the demand for renewable energy
power has provided
environmental consulting and engineering firms with opportunities
to diversify their services to
meet market demands and remain competitive. Company Y has been
successful in meeting such
demands through its wind power environmental impact assessment
service in B.C. and should be
able to transfer that experience to the energy market in
Alberta.
43
Source: Canadian GeoExchange Coalition 2010
2.9.4 The Carbon Offset Market
The Carbon Capture and Storage market potential is particularly
high in the Canadian
provinces of Alberta (70.7 tons/inhabitant) and Saskatchewan (72.2
tons/inhabitant) where GHG
emissions per capita are significantly higher than the Canadian
average of 22.7 tons per
inhabitant. The introduction of the Carbon Capture and Storage
Amendment Act 2010 provides a
strong market opportunity for environmental consulting and
engineering firms like Company Y.
In 2009, the global low carbon environmental goods and services
sub-sector (LCEGS)
was valued at $4.5 billion across national markets. The global
carbon offset market with an
annual growth rate of 176% was valued at $128 billion in 2008
(Figures 12 and 13). Both
markets offer opportunities for Company Ys carbon and energy
efficiency service.
44
Source: ECO Canada 2010
Source: ECO Canada 2010
45
In summary, a profound change in attitude across governments,
businesses and
individuals worldwide, triggered by climate change, represents a
tipping point for an
environmental sector with mature and growth market segments. The
environmental industry is a
moderately attractive one in which environmental consulting firms
diversify to meet
environmental market demands.
The demand for energy and heat efficiency, and climate change
services is at a global,
national and provincial level. In Canada, the single-dwelling
residential retrofit market for
geoexchange systems is valued at $179.5 billion with a 100%
penetration rate, and the market is
moderately competitive. In Alberta, the top three geoexchange
system installers captured 55.82%
of the market and the top installer captured 27.91% of the market.
In B.C. the top three installers
captured 29.35% of the market. Unfortunately, financial incentives
for residential geoexchange
systems are not available in Alberta or B.C., unlike in the rest of
Canada where the average
government funded incentive is $9,000-$10,000. The absence of
residential incentives in some
provinces is expected to slow buyer demand.
In 2008, the environmental consulting and other scientific and
technical services industry
generated revenue of $4.2 billion, of which environmental
consulting generated $1.64 billion, an
overall increase of 10.4% from 2007, and 32% of total revenue from
all consulting services. In
2009, the global environmental services market was valued at $228.5
billion, and by 2014, its
predicted value is $276.4 billion (DataMonitor, 2010).
In 2009, the global low carbon environmental goods and services
sub-sector (LCEGS)
was valued at $4.5 billion across national markets. The global
carbon offset market with an
annual growth rate of 176% and valued at $128 billion in 2008
offers opportunities for firms like
Company Y willing to compete in this environmental
sub-sector.
Company Ys existing client base in the resource heavy, carbon
polluting industries like
mining, and oil and gas present the firm with opportunities to
offer niche services that will
capture 100% of the value chain. Such a service would start with an
environmental audit, site
assessment, or feasibility study.
3: INTERNAL ANALYSIS
This section examines the Renewable Energy divisions geoexchange
service and
Company Ys resources, strategies and financial performance in
further detail.
3.1 Where Company Y’s Geoexchange Service Adds Value
3.1.1 Geoexchange Technology
Geoexchange is a relatively new, commercialized heat and energy
efficiency technology
that enables owners to use the grounds heating and cooling
properties to heat and cool their
property efficiently while reducing GHG emissions. Geoexchange is
also known as earth-
coupled, earth energy, water-source heat pumps or ground source
heat pumps. A system is
comprised of thr